Are we experiencing an off-the-books boom?

posted at 12:41 pm on March 19, 2013 by Ed Morrissey

Wages are down. Jobs are stagnant. The economy hasn’t generated the kind of growth that should fuel consumer spending. Yet we are seeing consumer confidence and spending numbers that belie the normal metrics that measure economic health. According to US News’ Rick Newman, economists suspect that an underground economy has begun to bypass the normal channels of commerce:

Something fishy is going on in consumers’ wallets.

Household spending has held up surprisingly well in recent months, even though new taxes have reduced paychecks and other problems are holding back the economy. Incomes haven’t risen by nearly enough to explain the entire boost in spending. Nor has the use of credit cards.

When your teenager starts wearing expensive clothes and flashing bling he couldn’t possibly afford through his part-time job, you start to wonder where the money is coming from. Some economists are asking the same question about consumers who seem more flush than they ought to be. The answer may lie in the large “underground” economy that doesn’t show up in official statistics.

There are always some businesses and individuals operating on a cash basis to dodge taxes, evade regulations or conceal illegal activity. Economists now speculate that the underground economy may have swelled during the last few years, given all the people who can’t find full-time work at decent pay.

“Severe recessions have historically driven jobless Americans into the shadow economy,” writes Bernard Baumohl of the Economic Outlook Group. “We suspect the destructive nature of the last downturn and the prolonged weak recovery pushed a record number of people into that murky world of cash transactions.”

First, it should be noted that a “black market economy” is not a healthy sign, even if it provides an alternative boost to a stalled overall economy. It’s not safe for any of its participants, for while it avoids irrational regulation, it also avoids rational regulation as well. The cash economy might make it easier for some of the chronically unemployed to find ways to make ends meet, it represents no investment in either direction in future health and growth of the markets involved. Further, it’s not healthy for the government that creates or amplifies such a market, if for no other reason than it cannot extract rational revenues from its participants, putting more of a burden on legal commerce.

If this is indeed the reality of the current American economy, we should ask ourselves how we arrived at this situation. Because of everything I described in the preceding paragraph, it’s usually more risky than lucrative to engage in underground commerce, and often more costly in various ways. Only when government expands regulation (and especially irrational regulation) enough does that imbalance tip toward taking the riskier route. We have spent the past five years since the financial crisis making regular hiring more expensive via ObamaCare especially, but also through Dodd-Frank, too.

Thanks to these new costs, the value of the regular hire has declined dramatically. It’s not terribly surprising, then, that we’re seeing less of that kind of employment. Our labor-force participation rate has dropped to 63.5%, a 34-year low, and those who have been out of work the longest have the least value now in the above-ground labor market. It costs too much now for companies to create open positions that carry the costs of mandated health insurance. Instead, more employers appear to be paying cash for what used to be called piece work in a bygone era.

As long as this remains the case, the regular economy will never right itself, and we will lose the opportunity for positive investment and long-term economic health until we correct these issues.

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